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NY futures close the week nearly unchanged
06
Feb '10
NY futures closed the week nearly unchanged, as March dropped just 15 points to close at 68.99 cents.

Despite another stellar export sales report this morning, it was nearly impossible for cotton futures to withstand the negative wave that has swept through global capital markets. The sell-off in many of these outside markets has been very pronounced and broad based, as the MSCI World Stock Index fell 2.3 percent, crude oil dropped 5 percent and even gold was down by over 4 percent. Interestingly, food crops managed to buck the trend, with corn, soybean and wheat all closing higher. Meanwhile, the Euro continued its slide against the US dollar and has now lost around 9 percent since early December.

US export sales once again beat the consensus estimate as no less than 668'800 running bales of Upland and Pima cotton were sold last week. Although 143'500 of these bales were sold for August onwards shipment, we have to assume that most of them will be supplied out of current crop. Total commitments for the season have now reached around 8.4 million statistical bales, of which some 4.5 million bales have so far been shipped. Depending on how much of the 'new crop' commitments will be shipped from existing supplies, we estimate that only around 6.5 to 6.8 million bales remain unsold at this point, including the certified stock.

US cotton is clearly dominating the export market at the moment, as weekly sales have averaged nearly 500'000 bales over the last four weeks for both crop years combined. This has a lot to do with the fact that the futures market has fallen more than twice as fast as the A-index, which has allowed shippers to sell their US basis-long positions ahead of foreign growths. While March futures have lost 701 points since closing at 76.00 cents on January 4th, the A-index has only dropped 325 points since posting a high of 79.85 cents on January 5th. Another factor that is motivating shippers to push US export sales, unlike in prior seasons when the AWP redemption game was being played, is that US cotton incurs carrying charges on a daily basis, whether it is in the loan or not. This has led to a sense of urgency to dispose of US inventory, while many foreign positions are contracted for forward shipments, which allows merchants to be more patient.

Despite the recent increase in the selling basis, mills have continued to buy a lot of cotton "on-call". The latest report as of January 29 shows that while on-call sales based on the March contract have dropped by 283'500 bales net last week, unfixed on-call sales based on May and later contracts have increased by 602'900 bales net. Total unfixed on-call sales now amount to 5.22 million bales, whereof 3.44 million are on current crop March, May and July, which means that they will have to be fixed within the next four-and-a half months.

We believe that this drop in prices, which was brought about by outside forces, has rendered the fundamentalpicture of cotton even more bullish. To us the question is not if, but when the market will rebound and from what level? Since this will to some degree depend on what happens on the macroeconomic front, let's take a closer look at what is currently going on in the financial markets!

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